Foundations Are Laid for Future Trade

Published April 12, 2012

(Jakarta Globe) Last year, Indonesia’s clove cigarettes made headlines internationally. In an unprecedented move, Indonesia challenged superpower trading partner the United States at the World Trade Organization’s dispute settlement body over the US Family Smoking Prevention and Tobacco Control Act. That law effectively banned the circulation and import of Indonesian clove cigarettes to the United States, with Washington claiming that the FSPTCA was necessary to curb teen smoking.

Many considered the challenge a courageous step — an attempt to prove that not all policies of the most developed countries are necessarily in compliance with international trade rules. The move also challenged the perception that the WTO is the creation of developed countries and only serves their interests.

Then, last week, the appellate body of the WTO announced that it had upheld the findings of the US-Clove Cigarette Panel (the first stage of the dispute settlement mechanism in the WTO), over which the United States had filed an appeal. It said the FSPTCA was a violation of the Agreement on Technical Barriers to Trade (TBT). Specifically, it found that the design, architecture, revealing structure, operation and application of the FSPTCA had an adverse impact on competitive opportunities for clove cigarettes, which amounts to discrimination.

But does last week’s recommendation mean that Indonesia has actually won? The answer is not as straightforward as you might think. First, we have to take a closer look at the dispute.

The United States had argued that because of the taste of the clove, teenagers could easily get hooked on kretek cigarettes because of their less bitter taste. In order to prevent teens from picking up smoking, the flavored cigarettes were outlawed. Indonesia, however, claimed that the FSPTCA was discriminatory because the ban was imposed on flavored cigarettes like kretek, but not on menthol ones.

Faced with these arguments, in September 2011, the panel issued a report with a mixed ruling. Three rulings were in favor of Indonesia. First, that the FSPTCA amounts to less favorable treatment of clove cigarettes inconsistent with Article 2.1 of the TBT.

Second, the United States failed to allow for a reasonable interval of time between the date of publication of the FSPTCA and the date the law went into effect. Third, the Americans failed to notify the WTO Secretariat of the measure. The Americans filed an appeal on the first two points won by Indonesia.

But the United States also won several points, with the most important one being that the WTO body did not consider the FSPTCA more restrictive of trade than necessary to fulfill a legitimate objective. In other words, the means justified the end. The panel said that although the ban on flavored cigarettes supported the legitimate policy objective of reducing teen smoking, the fact that the ban didn’t apply to menthol cigarettes, which make up 25 percent of the US cigarette market, amounted to discriminatory treatment of other flavored cigarettes, including chocolate, strawberry and clove.

To put things in perspective, clove cigarettes accounted for a mere 0.1 percent of the US cigarette market between 2000 and 2009. But virtually all of the clove cigarettes circulated in the United States came from Indonesia. This is the reason the panel ruled that there was de facto discrimination against Indonesian clove cigarettes.

The WTO dispute settlement system is not a football game. Inconsistency with one provision results in the obligation to modify or to revoke the inconsistent policy by the losing party. Since the US appeal of the ruling regarding less favorable treatment toward clove cigarettes was rejected, the appellate body has issued a recommendation for the United States to comply with its report, despite the necessity of the FSPTCA to meet its legitimate objective of reducing teen smoking.

Now, to comply with the TBT Agreement, the Americans might have to choose between two options. The first is banning flavored cigarettes altogether, including menthol and clove, and the second is to lift the ban on clove cigarettes and all flavored cigarettes.

People might think that the enforcement of the body’s recommendation would be problematic because the United States is a superpower, but the WTO has a reasonably effective enforcement mechanism.

It starts with the adoption of the appellate body’s recommendation by the dispute settlement body, where all WTO member states are represented, and it is deemed to have been adopted unless all WTO members by consensus decide not to adopt it within 30 days after its circulation, in this case early May.

Within 30 days after the adoption of the recommendation, the losing party informs the dispute settlement body of its intentions in implementing the recommendation and the ruling. If the losing party does not implement the ruling within a reasonable period of time, the winning country is entitled to resort to retaliation if no compensation is agreed upon by the parties.

Statistics show that the system works quite effectively. From 1995 to 2012, 80 percent of the adopted recommendations have been complied with by the losing countries. Only 13.6 percent of the adopted recommendations were not complied with and led to retaliation. So if the United States refuses to do something about its FSPTCA, Indonesia would be able to request retaliation against American products accordingly.

The 2007 result of a long-running gambling case involving Antigua and Barbuda shows that even a tiny country can retaliate against Uncle Sam.

The government has taken bold steps in this case, which indicates that just like any other nation, Indonesia will not stand by idly when its products are being discriminated against. It also sends a clear message to our trading partners that compliance with international agreements is the utmost foundation of future trade relations. Had the government not taken this step, in the future we might have heard of other products originating from Indonesia being unfairly targeted.

We should also give due credit to the WTO as one of the most effective forums for the settlement of trade disputes. We can only hope that this David versus Goliath story also ends well at the dispute settlement body in the coming weeks.

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By Junianto James Losari & Joseph Wira Koesnaidi

Junianto James Losari works at the Office of the Special Staff of the President for International Affairs. Joseph Wira Koesnaidi is a trade lawyer and can be contacted at joseph.koesnaidi@jwklawoffice.com. The views expressed are the authors’ own.